Subject: S7-14-98
Date: 6/22/98 11:10 PM
Dear Sirs:
With respect to your proposed changes to Rule 504 I believe you are
targeting the wrong area. With respect to the fraud that is happening
you should be trying to deal with the cause of the problem and not just
the symptoms. You will be hurting to many microcap companies whereas
what you should be trying to do is close down the fraudulent people
themselves.
The problem is with information disclosure. If financial and other
information is available then both the investors as well as their
brokers should have enough information to make a properly informed
decision. With all companies becoming reporting in the near future
enough information should become available so as any broker should be
able to help direct their client and the responsibility should fall on
them. Hence the problem really should be directed to brokers providing
guidance and proper disclosure for these kinds of companies and this
should be able to stop the fraudulent promoters from being successful.
If this is done properly there would be no need to penalize the majority
of microcap companies.
The problem with making the Rule 504 shares "restricted" would be
putting too high a risk on the microcap stock investor. Microcap
companies can be, by definition, very risky. By putting a restriction
on the shares of such an offering you are greatly increasing an
investors chance of losing a large part or all of his investment. Unlike
a larger company, such as IBM, that you know has a good chance of
retaining it's share price after one year or even increasing, a good
percentage of microcap companies just don't make it. With these kinds
of odds it will make it extremely difficult for microcap companies to
attract investors when they know that they could lose a substantial
portion of their investment because they are locked into their
investment for the holding period.
The other thing with treating the symptom and not the cause is it will
only have a mild effect on the real problem which is the fraudulent
promoters. If this proposed rule change takes effect, what would stop
an uscrupulous promoter from creating the same paper that he is now and
holding it for the waiting period and then doing the same thing that he
is now. By changing Rule 504 all you will be doing is delaying the
problem as opposed to curing it. Where there's a will there's a way and
the unscrupulous will find ways around this particular rule change. In
my humble opinion the real cure is in regulating the brokers or making
them more responsible and trying to provide more information to the
investor so that they can make better informed decisions rather than
punishing the issuers for a few bad apples in the bunch.
Robert M. Gelfand
StarAsia Capital Group
Bangkok, Thailand